Gold­man Sachs cau­tious on small-caps

In­vestors who pre­fer to in­vest in small-cap stocks in­stead of Dow Jones In­dus­trial Av­er­age and S&P 500 In­dex stocks may have a dif­fi­cult time through the rest of 2014. That is the take of a re­port from Gold­man Sachs, sig­nalling that the gains in small-cap stocks will be less than in large-cap stocks.

Gold­man Sachs strate­gist David Kostin raised his price tar­get for the S&P 500 in the past week, up to 2,050 from 1,900. It sounded more bullish, but the re­al­ity is that this is just very lim­ited up­side. Kostin’s new call im­plies up­side of roughly 4% for small-cap stocks, ver­sus roughly 6% up­side in large caps. Kostin be­lieves the Rus­sell 2000 has got­ten pricier than the large-cap in­dexes. The ra­tio that he rep­re­sents is 21.3 times for­ward price-to-earn­ings ra­tios. Another is­sue that was pointed out is that the av­er­age is less than 16 times for­ward earn­ings over the past five years.

Much of the Gold­man Sachs call refers to Fed Chair Janet Yellen’s re­cent com­ments that cer­tain as­pects of small caps had got­ten pricey. Yellen did not spec­ify any com­pany names out­side of se­lect­ing a brief ref­er­ence to tech (so­cial) and biotech. Another con­cern brought up by Kostin is that small­cap stocks saw a deeper cor­rec­tion ear­lier this year and are now up only 1% so far this year.

Gold­man Sachs can move mar­kets when it makes ma­jor changes. That is not re­ally up for de­bate. Still, its bear­ish-to­b­ullish bias change was very late - and it is still calling for up­side.